Inequity Aversion Preference,Ownership Structure And Executive Compensation Contract

Compensation contract is the core of the principal-agent theory, whoseincentives on the behavior of managers has also been a hot topic of academicresearch. In recent years, many norms related to executive compensation policyintroduced by China's regulatory authorities has arisen the negative incentive effects,such as, although the implementation of equity incentive programs have playedcertain incentives, it generate many new agent problems; the original intension of thefrequently-issued salary limit order is to reduce the pay gap, but it causes greaterinjustice, because executives turn to pursue the hidden income or private benefits ofcontrol, while reducing the incentives of the normal compensation contract. In thepractices and policies of compensation contract system, various anti-incentivephenomenons occurs because, in China, not only the regulatory authorities but alsothe production department is far from clear of the internal mechanism ofcompensation contract. These issues need to be further clarified.In order to analyze the incentive effects of the compensation contract in china,after a brief review of several major forms of the social preferences, based on a set ofexperimental design, in October2011to March2012, Jinan University, MBA andMPAcc class experiments were carried out, this paper screening of the relativeimportant of a variety of social preferences of Chinese managers, and found that,compared to the United States and other Western countries, China's managersperform more intense in inequity aversion preferences than other social preferences(completely self-interested preferences, competitive preference, quasi-maximumpreferences, reciprocity, etc.). In the response experiments we found that, during amulti-period game, a large part of other social preferences of the managers in factcan be explained by difference aversion preferences. Overall, more than70%managers in China have obvious inequity aversion preferences. On this basis, thispaper construct a theoretical model adopted managers' inequity aversion preferences.For the proposition and its corollary obtained in the model, on the one hand, thepaper using survey data to direct prove; on the other hand, bases on China's A-share listing2001-2010Public disclosure compensation data, using an alternativemeasuring way for the inequality aversion preferences to test the proposition and thecorollary of the model systematically.In the theoretical model, this paper focuses on the part of executivecompensation structure that sensitive to performance (including Floating wages,equity incentive programs, options, and certain private benefits of control, etc.). theequilibrium correlations predicted by a model where firms with different ownershipstructure and managers with different inequity-aversion aversion and talent matchendogenously through incentive contracts which mainly analyze the role ofinequity-aversion preference in the executive incentive contracts. Specifically,Equilibrium model provide five testable proposition:(1) dispersed shareholding or thecompany of equity balance have more advantage in the provision of more incentivescontract or contract that more sensitive to performance;(2) the slope of compensationcontract has positive correlation with advantage inequity-aversion; while disadvantageinequity-aversion has the reverse incentive effects;(3) in equilibrium, the managerswho facing the steeper slope of the contract will exert more efforts, earn more (fixedpart and floating part) and display higher job satisfaction;(4)control for ownership,the firm that provides higher incentive would have higher firm performance and alsohigher firm value.(5) the benefits of control has a substitution effect on the slopecompensation contract, and thus have the reverse incentive consequences, the greaterthe degree of substitution, the greater the reverse incentive. After this, the paper makea new questionnaire survey that contains data on managers' inequity-aversionpreferences and human capital, on their compensation schemes, and on the firms theywork for and found that the data is consistent with the equilibrium correlationspredicted by the model. The empirical results that bases on China's A-share listingPublic disclosure compensation data also support the applicability of the aboveproposition and corollary in china, broadly.